Las Vegas Construction Is Coming Back
In the decade before the Great Recession hit Las Vegas in 2008, Sin City’s economy was on a roll unlike anything ever before seen. Contractors feasted on the construction of opulent new megaresorts like Bellagio (opened in 1998—$1.6 billion total construction cost), Venetian (1999 – $1.5 billion), Wynn (2005 –$2.7 billion), and Palazzo (January 17, 2008 – $1.8 billion), just to name a few. The new construction projects brought incredible prosperity to the city and in October of 2007 Las Vegas set a new record for gaming revenues. Las Vegas had the hottest economy in the country, resulting in a booming real estate market. Developers, seizing on soaring residential real estate prices, planned and built numerous residential communities and luxury high-rise condominium complexes. Vegas, it seemed, could not lose. Then, in 2008, everything changed.
As the credit crisis swept across America, projects in Las Vegas that had seemed like “sure things” were now viewed as too risky to continue. Boyd Gaming suspended construction of Echelon, which had been estimated to cost $4 billion, on August 1, 2008. Financiers of Fontainebleau, a $1.6 billion Las Vegas Strip resort, stopped lending and construction ground to a halt. Even MGM Resorts International, Las Vegas’s largest gaming entity, was forced to obtain new financing and restructure the ownership in order to continue progress on its historically audacious project, CityCenter (ultimately built for $9.2 billion). As a result, the same scaffolding and cranes that once symbolized Las Vegas’s vitality and growth were now idle images of economic stagnation.
The outlook was bleak. Industry insiders suggested that the Strip might not see a resumption of substantial building activity for a decade. Fortunately, they were wrong.
Slowly, America is beginning to climb out of the Great Recession and so is Las Vegas, its favorite adult playground. The Genting Group acquired the 87-acre Echelon site from Boyd Gaming and recently commenced work on Resorts World Las Vegas, a resort estimated to cost between $2 and $7 billion, at the site. Caesars Entertainment Corporation recently completed construction of The High Roller, the world’s tallest observation wheel, on the Strip at a price of $550 million. Two older Strip properties have been rebranded and undergone complete makeovers—the Sahara is now SLS after a $415 million overhaul, and, after spending $200 million, Caesars Entertainment is transforming Bill’s Gambling Hall into The Cromwell, a trendy boutique property. Additionally, major off-Strip commercial projects have begun moving forward. The Shops at Summerlin, an upscale outdoor mall on the West side of Las Vegas that had been dormant since 2009, is scheduled to open in late 2014. ManhattanWest, another substantial West side project that stopped abruptly as a result of financing problems, has finally been sold and work is again underway. Perhaps most significantly, gaming revenues topped $11 billion in 2013 for the first time since 2008, a strong indicator that Las Vegas’s economy is strengthening.
The Nevada Supreme Court Issued Several Opinions During The Recession Affecting Construction
The Great Recession has been incredibly difficult for Nevada contractors, subcontractors and design professionals, causing some to look for work out of the state, to find alternative means to generate revenue, or otherwise not follow changes in the law as closely as perhaps they once did. With the rejuvenation of Las Vegas’s construction industry, however, it is important for all construction professionals doing business in Nevada to be aware of several important decisions issued by the Nevada Supreme Court during the Great Recession.
Liability For Economic Loss: Halcrow, Inc. v. The Eighth Judicial District Court, 129 Nev. Adv. Op. 42, 302 P.3d 1148 (2013)
In this case, the Nevada Supreme Court held that purely economic damages sustained in the context of a commercial construction project are only recoverable under a breach of contract theory; therefore, negligent misrepresentation claims against an engineer/designer are barred by the economic loss doctrine.
The general contractor sued the developer of a commercial, non-residential development. The developer counterclaimed and filed indemnity-based third-party actions against two of its subcontractors, which, in turn, filed third-party indemnity claims against an engineer/designer, Halcrow, Inc. (“Halcrow”) and others. The subcontractors did not have a contract with Halcrow and sought indemnity on a negligent misrepresentation theory. In response, Halcrow moved to dismiss the subcontractors’ claims, arguing that the Nevada Supreme Court’s ruling in Terracon Consultants Western, Inc. v. Mandalay Resort Group, 125 Nev. 66, 206 P.3d 81 (2009), barred unintentional tort claims against design professionals for purely economic losses in commercial construction projects. The trial court granted Halcrow’s motion to dismiss, but permitted the subcontractors to amend their pleadings to conform to the Court’s ruling. The Court also stayed the proceedings pending the Nevada Supreme Court’s resolution of the issue.
The Nevada Supreme Court ruled in Halcrow’s favor. The Court noted that its decision in Terracon left open the existence of exceptions to the economic loss doctrine for negligent misrepresentation claims; however, the Court did not believe that such an exception is applicable in the construction project context, concluding:
[I]n commercial construction defect litigation, the economic loss doctrine applies to bar claims against design professionals for negligent misrepresentation where the damages alleged are purely economic.
Halcrow, 302 P.3d at 1154.
Design Professional Liability: In re CityCenter Construction and Lien Master Litigation / The Converse Professional Group, dba Converse Consultants v. The Eighth Judicial District Court,129 Nev. Adv. Op. 70, 310 P.3d 574 (2013)
In this case, the Nevada Supreme Court clarified the attorney affidavit and expert report requirements (often referred to as certificates of merit) of NRS 11.256, et seq. in actions against design professionals.
Numerous parties were involved in this commercial dispute. Certain defendant subcontractors brought cross-actions against The Converse Professional Group, dba Converse Consultants (“Converse”) claiming that any damages Converse caused were due to Converse’s negligent performance of inspection services. Converse moved to dismiss the subcontractors’ cross-actions on the grounds that it (Converse) was a design professional and that, due to the subcontractors’ failure to file an attorney affidavit and expert report, their actions against Converse were barred by NRS 11.259 and subject to dismissal pursuant to Otak Nevada, LLC v. Eighth Judicial District Court, 127 Nev. Adv. Op. 53, 260 P.3d 408 (2011). After expressing concern that NRS 11.259, by its express terms, may require the dismissal of the entire litigation, the trial court denied Converse’s motions to dismiss the subcontractors’ cross-actions. Converse sought review from the Nevada Supreme Court.
The Nevada Supreme Court concluded that Converse was acting as a design professional when it performed testing/inspection services related to the subcontractors’ work, and that the subcontractors should have filed an affidavit and expert report at the same time they filed the cross-actions against Converse. In re CityCenter, 310 P.3d at 579-80. Due to their failure to file the affidavit and expert report, the subcontractors’ claims were void ab initio and of no legal effect. However, the Court determined that NRS 11.259 required only the dismissal of the subcontractors’ cross-actions, and not the entire litigation. Id. at 580-81.
Mechanic’s Lien Rights: J.E. Dunn Northwest, Inc. v. Corus Const. Venture, LLC, 127 Nev. Adv. Op. 5, 249 P.3d 501 (2011)
In this case, the Nevada Supreme Court clarified the work for which a contractor can obtain recovery under a mechanic’s lien when a construction lender is involved with the project.
Midbar Condo Development (“Midbar”) hired J.E. Dunn Northwest, Inc. (“Dunn”) to perform a feasibility analysis, serve as construction manager, and be the general contractor for a condominium project (“Project”). After Dunn had performed more than $1 million of preconstruction services, Midbar obtained a construction loan from Corus Bank (“Corus”). Corus recorded a deed of trust on the property, thereby asserting priority of its deed of trust over Dunn’s mechanic’s lien rights. Dunn subsequently recorded liens on the property and filed suit, seeking a declaratory judgment establishing that its lien rights had priority over Corus’s deed of trust. The trial court ruled in Corus’s favor, finding that Dunn’s preconstruction work did not establish the accrual date for its lien because it was not visible work. Dunn appealed.
The Nevada Supreme Court upheld the district court’s ruling, reasoning that, although off-site work such as architectural services may constitute a lienable amount pursuant to NRS Chapter 108, the performance of off-site work does not establish the accrual date for the commencement of construction activities for the purpose of establishing lien priority. Additionally, preconstruction work, such as clearing or grading may require an on-site presence but does not constitute construction and does not start the clock either. Instead, the Court held, “the commencement of construction requires ‘actual on-site construction,’” further clarifying that “visibility alone determines priority.” J.E. Dunn, 249 P.3d at 505-507.
Contractual Defense And Indemnity Obligations: Reyburn Lawn & Landscape Designers, Inc. v. Plaster Dev. Co., Inc., 127 Nev. Adv. Op. 26, 255 P.3d 268 (2011)
In this case, the Nevada Supreme Court clarified the defense and indemnity obligations under a contractual indemnity provision.
A group of homeowners filed a construction defect action against the subdivision developer, Plaster Development Company (“Plaster”), alleging construction defects with respect to a retaining wall. Plaster filed a third-party complaint against, among others, Reyburn Lawn & Landscape Design (“Reyburn”), one of Plaster’s subcontractors, seeking indemnity pursuant to an indemnity provision contained within the Plaster/Reyburn subcontract. Plaster argued that the broadly worded indemnity provision obligated Reyburn to indemnify Plaster against Plaster’s negligence. The Supreme Court rejected Plaster’s argument, ruling that an indemnitor, such as Reyburn, has no obligation to indemnify an indemnitee, such as Plaster, for the indemnitee’s (Plaster’s) negligence unless it is “expressly or explicitly” stated in the indemnity provision:
…we conclude that because the indemnity clause does not expressly or explicitly state that Reyburn would indemnify Plaster for Plaster’s contributory negligence, Reyburn is required to indemnify Plaster only for liability or damages that can be attributable to Reyburn’s negligence.
Reyburn, 255 P.3d at 275. Further, the Court limited the defense obligations imposed by contractual provisions:
… we now hold that unless specifically stated in the indemnity clause, an indemnitor’s duty to defend an indemnitee is limited to those claims directly attributed to the indemnitor’s scope of work and does not include defending against claims arising from the negligence of other subcontractors or the indemnitee’s own negligence.
Reyburn, 255 P.3d at 278.
It is an exciting time in Las Vegas for construction. Major projects are underway and more are planned, but the recession has left its mark on the industry and the way the law helps to assure fairness and predictability. These opinions and many others demonstrate how the law adapts to changes in the economy and the relative power of contracting parties. As we move forward into a new era of prosperity here in Las Vegas, owners, contractors, subcontractors, and design professionals can avoid problems, delays, headaches, and costs by staying aware of the impacts, subtle or profound, that recent decisions from the Nevada Supreme Court may have on the way they conduct business.